Treasurer's super 'strife' sent back to the future

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The shrewd genius of the Treasurer, it seems, is equalled only by the utter incompetence of his department. Just two months before the end of the year to June, Treasury managed to come up with a forecast of the surplus for that same year almost 50 per cent, or $3.5 billion, too low. And just six months later, the estimate for this year has had to be almost doubled to $5.3 billion.

Out in the real world these are the sorts of profit guidance shenanigans that cost CFOs their jobs.

Actually, we should give up these PEFO (Pre-Election Economic and Fiscal Outlook) things altogether. They were originally designed to stop optimistic politicians forecasting unreal growth dividends to fund their real election promises, but these days, with the lolly pouring in faster than Treasury can count it, PEFOs just encourage the buggers.

The financial position of the Government is so good that even Treasury is astonished. Treasurer Peter Costello might have been astonished too but he hid it. The most important thing for him was to appear statesmanlike and have his story ready: it's a "Future Fund" to pay for unfunded Commonwealth super. Journalists at his press conference in Melbourne's Treasury Place were an unprepared rabble when this one emerged from the Costello lips.

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The genius of the Future Fund idea is four-fold: it allows him to whack a foot on the surpluses revealed in the PEFO while he thinks about what to spend them on; it lets him look like he's doing something about the unfunded public servants' super without having to actually do it yet (this trick is the essence of politics of course); it involves putting the money somewhere other than the actual Commonwealth super funds so it can be got out again later; and, finally, you can still report surpluses - the payments will apparently work like dividends, below the line.

Where's all this money coming from? Thirteen years of economic expansion, and a tax explosion.

Here's how the numbers look on Commonwealth super. The two public service funds, the CSS (now closed) and the PSS have $11.6 billion in assets between them. The Government actuary estimates the present value of their future pension liabilities to be $70 billion - about $58 billion more than they've got. The military super fund has $1.5 billion invested; the present value of its future commitment is about $31.5 billion.

Thus, total assets are about $88 billion less than liabilities.

Each year this gap widens further because annual contributions are less than they should be (which is another way of saying that the budget balance is overstated). Cash flow into the PSS/CSS (Government contributions minus payments) is $160 million this year. It should be $1.3 billion. The figures for the military fund are similar.

Next year, the contribution requirement is more than $3 billion for both - about 10 times what will actually be paid by the Government.

If that $3 billion were actually paid from now on, that would only prevent the gap between assets and liabilities continuing to grow.

To increase Government super fund assets fast enough to meet liabilities in, say, 25 years, another $2 billion a year in contributions would have to be paid, assuming 6 per cent nominal investment returns.

This means the total needed each year equals, as it happens, the entire cash surplus forecast by Treasury (which is almost certainly wrong).

So if the Treasurer wanted to fully fund public servant pensions some time before he died, there would be no surplus at all. In other words, strictly speaking, the 2004-05 surplus does not exist.

But it will exist, because instead of putting the money into the CSS/PSS and the defence forces super fund, where it belongs, Peter Costello says he is going to put declared surpluses into a new fund, to be called the Future Fund, to be created in the future. Why not put any extra money into the existing super funds?

Because that would come out above the line and reduce the surplus, and because once you make a contribution to a super fund, you can't get it out.

Note that it's not actually called the "Future Public Service Superannuation Fund", just the Future Fund. This could, when the time comes, mean the future of anything at all.

The other big question hanging over Friday's astounding PEFO is: where's all this money coming from? Every time the bean counters turn around there is more money in the bin. Amazing. It's due to 13 years of uninterrupted economic expansion, and a tax explosion.

John Howard and Peter Costello have seen total taxes, including GST, increase 71 per cent from $38 billion to $65 billion.

Indexation of total tax revenue at 2.5 per cent a year would have taken it to $46 billion. Instead the figure is $19 billion higher than that.

Even with public servants' salaries rising at twice the inflation rate, and "family welfare" exploding, it is simply too much moolah to spend while appearing statesmanlike.